When crunch talks go wrong

It’s a little-known fact that John Maynard Keynes was dosed up on mind-altering drugs when he carried out one of the most important economic negotiations in British history.

The ageing economist was suffering from heart disease when he was sent away to secure Britain’s post-war loan with the Americans. After a series of heart attacks over the previous years, his doctor Janos Plesch, a Hungarian whose remedies were so bizarre and occasionally gruesome Keynes and his wife Lydia had nicknamed him The Ogre, was seeking out new ways to keep him going.

There had been opium pills, weird experimental drugs from Germany, three-hour courses of ice packs to be laid on his chest. In one session, The Ogre even jumped up and down on Keynes’s back as he lay in bed. But by the time Keynes came to these crunch negotiations in 1945 he needed something more powerful: he was exhausted after years of tough negotiations (the Bretton Woods conference the previous year to take just one). Moreover, this was a massively important moment for the UK economy.

Like Greece today, Britain in 1945 was essentially bankrupt. The national debt was even higher than the Greek figure right now — more than 200% of GDP, most of it owed to British dominions such as Egypt and India (and the likelihood of their impending independence made writing that off extremely tricky). The Treasury had prevented a financial crisis by simply preventing anyone pulling their money out of the country: there were strict controls on capital flows, and on anyone trying to convert sterling into another currency.

But if Britain was to recover in the following years, it would need some help — which was what the crunch talks were all about. Keynes travelled to Washington DC to obtain whatever kind of assistance he could from the US. He promised his cabinet, and the pushy new Chancellor, Hugh Dalton, that he could potentially get a grant — free money. At the very least, he said, any loan he obtained would be interest free. In a striking parallel to what today’s Greek Prime Minister Alexis Tsipras said of Angela Merkel before making similar demands of the Germans (in his case for a debt write-off rather than a grant), Keynes declared that there was no way the Americans could refuse.

Not long after arriving in the US, he met a brick wall. The Americans would not agree to a grant. Oddly, Keynes’s frequent attempts to remind them of just how much Britain had suffered during the war, in comparison to them, seemed to infuriate the Americans rather than bring them onside.

In the face of this kind of resistance, most negotiators would attempt to tough it out — to tell the other side bloody-mindedly that they simply could not compromise; to threaten to bring the temple down around all their heads. That is more or less how the recent Greek negotiations have evolved in Brussels; that was how Keynes had played the negotiations at Bretton Woods.

In 1945 he did something different. Out of nowhere, he showed his entire hand, spelling out precisely what the British would accept in extremis: a loan, the lifting of those controls that were preventing money escaping the UK. It was a bizarre, unexpected move; unsurprisingly the Americans grabbed it with both hands, to the dismay of the rest of the British delegation, who moved to try to get Keynes thrown out as the lead negotiator.

Why did the great old man of British economics behave in this way? Most economists and historians have assumed it was largely down to a flawed negotiating strategy. Some think he was tired and outmanoeuvred by the Americans, who were far tougher than he expected. There is probably some truth in both claims.

However, there is a rather more intriguing version of the story: the medicine Keynes was taking to help with his heart conditions at this time was a barbiturate called sodium amytal. Indeed, Keynes wrote to The Ogre during the negotiations saying he had only managed to stay afloat thanks to the drug. What he didn’t seem to be aware of was that sodium amytal, taken in high enough doses, acts as a truth serum.

Now, it’s quite conceivable that Keynes did not take enough of the drug to affect his reasoning. But, extraordinary as this might sound, there is at least a chance that Keynes’s poker face failed during these crucial negotiations because he went into them under the influence of a truth serum. It is an astonishing detail which I couldn’t quite believe had been overlooked by previous historians when I wrote my account of this period, The Summit.

One assumes none of the negotiators in the current euro crisis talks is under the influence of mind-altering drugs, but the episode is a reminder of three things: first, the mindset of those in the room really does matter. Looking back, it’s clear that Keynes was not himself during these negotiations; it was clear, too, that his strategy failed — that he overpromised to his own cabinet and under-delivered in the talks.

Second, the results of such talks are not predestined. The US could quite feasibly have been more generous to Britain. It could have reduced the interest rate on the loan, it could have eased the conditions attached to it. As with Greece today, the main sticking point was not the loan itself but the conditions attached to it. In Britain’s case, the big issue was the Americans demand that Britain open up sterling to be converted into other currencies within a year. Everyone, Keynes included, knew that would be a disaster.

Third, the consequences of such deals last for decades. When, in line with the deal, sterling became fully convertible in 1947, it triggered one of the biggest financial crises in British history. Money escaped from the country as if from a giant plughole. In a sense, the global economic system was scarred forever, since the ordeal terrified any country considering making their currency convertible in the future.

And Britain’s economy was lumbered with troublesome debts for many more years. The need to pay off the debts meant taxes were higher, growth potential was lower and inflation was high for many years. Though they are often forgotten today, those debts overshadowed Britain’s economic performance for half a century: the devaluations, the repeated sterling crises, the recessions and eventual International Monetary Fund bailout.

Compare Britain to Germany, where half of the war loans were written off in 1953. The UK notched up average annual growth of 2.4% between 1950 and 2000, compared with 4% in Germany.

You can see why debt write-offs matter so much. Even years after they have or haven’t been negotiated, debt, or its absence, still influences every other facet of your economy. No wonder the Greeks are fighting so hard. The coming decades will depend on it.